NEW YORK, Dec 12 The U.S. dollar fell against
the euro and high-yielding currencies such as the Australian and
New Zealand dollars on Wednesday on expectations the U.S.
Federal Reserve would opt to pump more money into the banking
system.

But the U.S. currency also reached an eight-month high
against the yen on bets the Bank of Japan will implement more
aggressive monetary easing after an election on Sunday expected
to yield a victory for the Liberal Democratic Party.

The Fed is expected to announce a fresh round of Treasury
bond purchases later on Wednesday, with many economists
forecasting it will opt for monthly purchases of $45 billion.

The risk, analysts said, is that policymakers may decide to
buy more than that, which would put the dollar under further
broad selling pressure.

"All eyes are on the Fed and that has clearly been the
driver for this week, at least with the dollar down across the
board," said Omer Esiner, chief market analyst at Commonwealth
Foreign Exchange in Washington D.C. "We're seeing high yielders
like the aussie and kiwi benefit on expectations of further
central bank easing."

The euro rose for the third straight session, posting a 0.3
percent advance on Wednesday to $1.3038, well above a low of
$1.2878 reached last week and holding gains made after
better-than-forecast German economic sentiment data on Tuesday.

The more dollars the Fed pumps into the market, the more
cheaply borrowed funds investors have to invest in assets which
give bigger base returns, putting the focus on higher-yielding
currencies. The U.S. dollar, the euro, the yen and the pound -
the world's four most liquid currencies - all have near zero
interest rates now.

The Australian dollar rose to a three-month high
against the U.S. dollar.

The New Zealand dollar touched its highest since Feb.
29, while the U.S. dollar slipped to an eight-week low against
its Canadian counterpart.

YEN SEEN AS VULNERABLE

The prospect of more monetary easing in Japan continued to
hurt the yen, with the dollar rising to hit an eight-month high
, just shy of reported options barriers at 83.00 yen. It
last traded at 82.89 yen, up 0.4 percent.

The euro climbed to an eight-month high and was
last up 0.7 percent at 108.05 yen.

Market players said recent polls showing the opposition
Liberal Democratic Party (LDP) and its smaller ally are heading
for a resounding victory in the Japanese election had
contributed to the latest bout of yen weakness.

LDP leader Shinzo Abe has called for more aggressive
monetary easing in Japan to revive the stagnant economy.

"For the yen that means they will be able to implement
stimulus measures and operate more aggressive control of the
Bank of Japan, which will all point to further weakening of the
yen," said Neil Jones, head of hedge fund FX sales at Mizuho
Corporate Bank in London.

Jones forecast the dollar to rally to 90 yen by the end of
the second quarter of next year.

The successful launch by North Korea of a rocket on
Wednesday may also have weighed on the yen, analysts said.

Next In Markets News

WASHINGTON, Dec 9 The U.S. Senate passed
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sent it to President Barack Obama for signing into law, after
Democrats who sought more generous healthcare benefits for coal
miners stopped delaying action on the measure.